Jobs in America – the unemployment situation been a perceived blemish on the U.S. economy for some time, but the numbers don’t support the negative sentiment. In the month of August, the economy added 173,000 jobs and contributed further to the ongoing trend: monthly 2014 job additions were +10% above 2013, and 2015 is looking to be better than 2014.
Additionally, the June and July figures were revised higher and the unemployment rate fell from 5.3% from 5.1%. On the broader U.S. economic front, final Q2 2015 GDP grew +3.7%, well above a +2.3% initial read; consumption growth (which matters to stocks) grew +3.1% in the second quarter. From here, we expect modest but not disappointing GDP growth for the U.S. (with +2.5% as our base case). The jobs market and broader economic picture is getting better, not worse.
Oh, China – the stories continue to pour-in about China’s weakness and volatility. Expect them to continue. But as you read these reports, remember that China is still expected to grow more than 6.5% on year. That’s still huge growth and a sizable contribution to global GDP! A slowdown in China is expected based on their restructuring plans and a maturing bull; it should not be a shock to markets. In economic news, China cut its GDP growth figure for 2014 and reported a fall in imports by 14.3% year-on-year, with exports dipping by 6.1%. Much was made about China’s foreign reserves taking their biggest drop on record in August, cratering by $93.9 billion. That feels like a huge number, but not when you consider that China still has the world’s biggest stash of reserves! $3.5 trillion! Don’t worry.
Japan is Like a Box of Chocolates: You Never Know What You’re Gonna Get – growth, contraction, inflation, deflation, lots of debt and stimulus, and an alarmingly aging population. I’m not a huge fan of Japan for its inconsistencies and my concern is over future growth, given an aging population and a younger generation that is marrying less and staying home more. I stay wary, and it makes me warier when Japan’s economy contracts at an annualized -1.2% in April-June vs. an initial estimate of -1.6%. At the same time, however, Japan’s Nikkei 225 stock market index rose by 7.7% in one day last week, the most since October 2008. It’s difficult to add it all up. Apparently, the rally was propelled by the prospect of looser fiscal policy in China and a promise from Shinzo Abe, the prime minister, to cut corporate taxes next – he has pledged to cut rates by 3.3% from 35% (too high) next year and wants to eventually lower tax into the twenties. Tax cuts on corporations are great, but Japan just feels like they’re in a cycle of desperation for growth and inflation that never seems to stick.
Carnival Might be the Only Thing Going for Brazil Right Now – Standard & Poor’s downgraded Brazil’s credit status to junk for the first time since 2008, warning it could lower the grade even further in the coming months. A flailing leadership in Dilma Rousseff (whose approval rating has dipped into single digits amidst the Petrobras scandal) and failure to aptly balance a budget inspired the rating cut to BB+. Now, Brazil is between a rock and a hard place juggling high inflation with the need to stimulate the economy. Low commodities prices and a modestly growing global economy don’t help. If Brazil can’t get their economic house in order soon, it could experience massive cash outflows from pension funds which will only make matters worse. It’s not near the top of the list of attractive Emerging Markets right now.